Warren Buffett and Charlie Munger hosted Berkshire Hathaway's annual shareholder meeting last month in Omaha, including several hours of conversation with panelists and investors. (See the transcript here.) Below are some of the highlights.

On Choosing Investments

1. Bad markets can be an advantage. I take exception that I paid fancier prices. GE was 20x earnings. I paid a far bit more than I would. It gets tougher as we get bigger. The price would diminish and we could still be satisfied. There are companies we should have bought 30 or 40 years ago. Now we realize that paying up for companies is good.

2. That’s the great thing about investing – the universe is big enough that you always find more, but it’s not changing dramatically all the time.

3. Different numbers are of different importance depending on the kind of business. If you were a basketball coach walking down the street and a 5’4” person said you ought to sign me up, you might have a prejudice against him, but there might be one who’s good. And I might say good luck son, we’re looking for 7-footers, and then we have to worry about whether we can keep them coordinated and keep them in school. We see certain things that tell us, think further, look further. We’ve come up with the conclusion that we can’t make intelligent analysis of all kinds of businesses and usually some little fact slips into view that causes us to rethink something.

4. We don’t know about a computer company 10 years from now. We’re virtually 100% confident about Burlington Northern or Geico or some others I won’t name.

5. Generally speaking, if we get a chance to buy a wonderful business, and by that we mean it has characteristics that lead you to believe it will return an unusually high return on capital over time and better yet, get to deploy more capital at decent rates of return, we probably should stretch a little.

6. A person needs to stop and spend a reasonable amount of time becoming an expert on stocks. The real problem they have is they may get excited about stocks at the wrong time and really the idea of buying an index fund is not to buy stocks at the right time or the right stocks but is to avoid buying at the wrong time. You have to avoid getting excited when others are excited and about industries. There’s nothing wrong with being an amateur investor, but in an index fund you just simply have a logical profitable course of action which is to buy into American businesses in a broadly diversified way.

7. We may not see many anymore, but most people in this room in their lifetimes will see incredible opportunities in equity markets and maybe in bond markets, and things will happen and you have to be able to act, in terms of capital and mental fortitude to jump in when people are jumping out.

Wisdom

8. Charlie: It’s so old fashioned and boringly trite. Keep plugging along. All the old virtues still work. And work where you’re turned on.

9. You have to love something to do well at it. There may be exceptions. You’re at an enormous advantage if you love what you do every minute of it.

10. The game of life is a game of everlasting learning. At least it is if you want to win.

On Banking

11. Banking in the U.S. is stronger than in the past 20 years. Compared to the EU or 20 years ago, it’s dramatically stronger. Don’t worry about banking being the cause of the next bubble. Usually we don’t get to a bubble the same way we got to the last one. I feel good about our investments at MNT and Wells Fargo (WFC). We won’t earn as much return on equity because the rules change.

On Bank of America

12. Bank of America (BAC) in 2011 was subject to rumors, there was big short interest, morale was terrible. It struck me that an investment by Berkshire (BRK.A)(BRK.B) might be helpful to the bank and might be to us. I never met O’Brien, but gave him a call. Not because I calculated some precise P/E ratio, but because I have some idea of what the company may look like in five years and a reasonable amount of confidence and there was a disparity between price and value.

On the Macro Picture

13. Charlie and I don’t pay attention to macro forecasts. We have worked together now for 50 years and can’t think of a time we made a decision on a company where we’ve talked about macro. We don’t know what things will look like in precise way. Naturally we think if we don’t know that nobody else knows. Why spend time talking about something you don’t know anything about? People do it all the time. But it’s not very productive.

14. Throughout my adult lifetime there have always been opinions about what’s going to happen in the next years; nobody knows. What we know with a high degree of certainty is BNSF will be carrying more cars in a year or two. That there will be two important railroads in the West and two in the East and will have assets that will have incredible replacement value.

15. We don’t have anything against someone talking about a new normal; my own guess is people will do very well owning good businesses if they don’t pay too much for them in 20 and 30 years. If they try to time based on what they’re going to do they’re going to do very well for their brokers and not for themselves.

On Ben Graham Influence

16. I read every book in the public library on investing by age 11. But I never developed a philosophy, I just enjoyed stocks. Graham’s book gave me a philosophy, a bedrock philosophy on investing that made sense. It taught me how to think about a stock and the stock market. It taught me the market was there not to instruct me but to serve me. Think about stocks and pieces of businesses. So that philosophy was furthered by Phil Fisher’s book.

On Airlines

17. The airline industry has situation where have very, very, very low incremental cost per seat with enormous fixed costs. The temptation to sell that last seat at a very low price is very high and sometimes it’s very hard to distinguish between that seat and the last seat. It’s labor-intensive and capital intensive and largely commode type business. As Bill Miller points out, it’s been a death trap for business since Orville took off.

18. Charlie: You really couldn’t create another railroad. And you could create another airline. And that’s what I don’t like about it.

On Share Buybacks

19. Warren: Our intrinsic business value is considerably above book value and we have signaled that by saying we would repurchase shares as long as we had substantial cash balance that met the needs of operating companies at 120% of book value. We got the opportunity to buy and could probably buy a whole lot of it. The calculus is very important. We take care of businesses with money first. If you can buy additional businesses that could add to per-share value of the business you do that. If you can purchase shares at significant discount it’s like buying dollar bills at 90 cents. Very proven way of – hard for us to do it because every time we say we’re going to do it, people say, well, he thinks it’s worth more. We’ve got mixed emotions.

On Short-Selling

20. If we go back long enough, we’ve done a reasonable amount of short selling. We identified companies that we thought were way overpriced and some that we were virtually certain were frauds. Making a lot of money short selling is still not a game that appeals to us over the long period.

On the U.S. Economy

21. I’m disturbed by a national debt that grows in respect to GDP. I wrote an op ed in the New York Times in 2009 or 10 talking about that very problem. By the time we came out of WWII debt was higher and people were predicting terrible things at that time because of that situation. The real problem is it continues to grow and it’s easier to print money than exercising discipline. We’ve faced worse problems. This is not the country’s worst problem by far. We will do fine but with bickering that will bother you day to day.

22. Charlie: All problems are trivial if GDP will rise 2% per year per capita. All problems Republicans are screaming about will be fixed if we can do that.

23. Finally overhang in housing ended about a year ago so we’re starting to get some recovery in home prices which has a psychological effect and some improvement in construction but don’t want to start building again. We want housing starts that more or less equal household formation. I don’t think we’ll surge but I don’t think we’ll stall either.

On Foreign Investing

24. I’m willing to go any place where we can tell how things are going to be in five years and management and all the things we emphasize. We’ve never foreclosed anything but are going to find most opportunities in the USA.

25. We don’t really start out looking to either emerging markets or industries or anything of the sort. We may find things as we go around, but it’s not like Charlie and I talk in the morning and say it’s a particularly good idea to invest in India or China or whatever the case may be. We’ve never had a conversation like that. It won’t happen. It’s not where our strength is. Know it’s not there. Think probably most people’s strength isn’t there. It sounds good but it’s not the best way to look at investments. If you told me perfectly willing to do it – such as BYD – but if we were told we could only invest in the U.S. the rest of lives we would not regard that as a huge hardship.

On IBM

26. I don’t understand the moat around IBM (IBM) as much as around Coca-Cola (KO). I have some understanding of it but would have more conviction about the moat around Coke or Wrigley or Heinz than IBM, but I feel good enough about IBM that I put money in it and nothing precludes Microsoft and IBM both being successful. In fact I hope both are. We have enough conviction about IBM’s position. I like their financial position. Odds are good. I don’t feel the same degree of conviction about that than BNSF railroad. I can’t think of anything going wrong with BNSF. I can think of some things wrong with IBM. They have a huge pension fund too. Asset and liabilities – a big annuity company on the side. They can have balls that take 20 bounces in annuities. I would rather they didn’t have it but the fact is they do. They show assets and liabilities equal, but assets are more reliable over time.

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